In H1’11, China’s VC and PE market still saw great enthusiasm for fundraising. Besides foreign-funded LPs that continued to beef up input in China for strategic deployment, local LPs expanded fast as well thanks to the consistent improvement in the policy environment concerning local LPs, particularly the opening of the market to big-sized local institutional investors. As China’s VC and PE market rapidly developed, China’s LP market embraced a new round of growth. Zero2IPO Research Center, a famous VC & PE research institute in Great China region, first released the Research Report on Limited Partners in China’s VC and PE Market in 2011 to keep updated with LPs and offer analysis concerning the investment concepts and development trends for current and potential LPs.
Individual Local Investors Dominated China’s LP Market; Enterprises Showed Great Enthusiasm in VC/PE Investments
In H1’11, China’s VC & PE market maintained the momentum of growth in fundraising, with vigorous participation from LPs. The statistics from Zero2IPO database showed that in June 2011, there were 3,947 LPs collected in the database, including 2,434 institutions with the amount of capital available for investment disclosed to be US$652.31B. In terms of the number of LPs, rich families and individuals serve as the major source of fundraising in China’s VC & PE market, numbering 1,895 that represented 48.0% of the total and included over 90% of domestic investors. There are two reasons behind the huge number of high net worth individuals: i) As the number and wealth of domestic high net worth individuals keep climbing, equity investment becomes the focus of more and more individual investors in asset allocation and some individual LPs also hope to learn from top GPs through investments and thus explore their own equity investment businesses in the future; ii) The third part intermediaries, such as NOAH Private Wealth Management and the private banking divisions of some banks, help more high net worth individuals participate in equity investments. On one hand, the professional wealth management abilities of the third party intermediaries win recognition from more and more high net worth individuals; on the other hand, the concentration of wealth resulted from the closer ties between the third party intermediaries and excellent fund management companies that active in China’s market helps GP accomplish RMB fundraising in a more rapid and efficient manner.
Enterprise LPs ranked second by the number of funds raised, totaling 762, 19.3% of the total investors. Specifically speaking, local enterprises numbered 543, representing 71.3% of enterprise investors. With long periods of equity investments, big-sized state-owned enterprises and central enterprises mostly make investments for strategic purposes and conduct M&As for extension into upstream and downstream of the industrial chain. Zero2IPO Research Center finds that private enterprises have appeared active when expanding from industrial operation to VC/PE field in recent years, and many of them quickly set up subordinate VC/PE institutions or equity investment divisions. According to Zero2IPO Research Center, the motives mainly include the following two aspects: i) They conduct equity investments to serve their main businesses and integrate industrial resources; ii) Under the inflationary pressure, traditional industries yield increasingly shrinking profit affected by such factors as rising cost, whereas equity investments can offer higher returns and added value for the assets accumulated for years.
Foreign-funded Institutional Investors Held Huge Quantities of Capital while Their Local Counterparts Had Smaller Amounts of Capital Available for Investment
Among the VC/PE fund investors in China during H1’11, big-sized institutional investors represented by listed companies, public pensions, sovereign wealth funds, FOFs and enterprise annuities held 79.6% of the total quantity of capital available for investment in China, with the foreign-funded institutional investors respectively accounting for more than 85.0% of each type; by contrast, local institutional investors that held bigger amounts of capital available for investment were sovereign wealth funds, investment companies, enterprises and investment companies, with the capital available for investment far less than the LPs with years of investment experiences, showing their limited abilities in investing.
The National Social Security Fund (NSSF), which has local benchmarking effect in China’s VC/PE market, made frequent investments in H1’11. In April 2011, CDH Investments Phase II RMB Fund amongst others became the first batch of institutions that won the capital commitment of NSSF in 2011. At the end of April, NSSF strategically invested RMB10.00B in China Development Bank (CDB) in exchange for a 2.19% stake, becoming the first strategic investor of CDB after CDB’s transformation into a joint-stake corporation. The move was also conducive to the further strategic cooperation between CDB and NSSF in fund sources, project investment and entrusted project management, and the commitment of NSSF to invest in CDB-SVG FOF marked the upgraded cooperation between both sides. In June 2011, NSSF signed an investment agreement with CBC Capital, inputting RMB500.00M in the RMB fund established by CBC Capital-- Tianjin Cheng Bo Equity Investment Partnership (limited partnership), in which NSSF acts as a key investor. As China’s strategic reserve fund, NSSF’s investing in equity investment fund has far-reaching significance. It is believed that the maturity of big-sized institutional investors can be expected soon.
RMB LPs Comprised up to 77% by Number Whereas Foreign Currency LPs Still Had the Edge in the Amount of Capital Available for Investment
The capital available for investment in RMB, USD and EUR collectively accounted for 98.28% of the total. Specifically speaking, LPs holding RMB had the biggest number, being 3.83 times and 66.07 times that of LPs holding USD and EUR respectively. In terms of the amount of capital available for investment, however, USD funds gained comparable advantages, with the amount of capital totaling US$349.18B that made up 53.53% of the total.
As for the average amount of capital available for investment, EUR LPs include public pensions, FOFs and European policy banks (including the European banks with long-term focus on China’s market such as ABN AMRO, AFD’s subsidiaries and DEG) that holding huge amounts of capital. The big-sized institutional investors not only invest through PE, but also provide long-term support to the invested companies with follow-up loans relying on the large amounts of capital they manage. As the access policies for China’s VC/PE market keep loosening, more and more mature big-sized institutions managing enormous capital will spring up with increasing presence in both upstream and downstream sectors of the VC/PE field.
